In the ‘background’ section of the Finalised Guidance Paper FG21/3 Advising on Pension Transfers (March 2021) the FCA states: 

    "We are publishing this guidance to help firms give suitable advice consistently. After reading this guidance, some firms may need to make changes to their processes where their approach falls short of the standards set out in the guidance.  

    These changes are likely to include the way in which firms:  

    • Collect information about their client’s circumstances to give suitable advice 
    • Use the information they collect to assess whether a DB transfer is suitable 
    • Communicate their advice effectively to consumers"

    But don’t be confused by the label.  

    This paper is essential reading for any adviser, whether they give advice on DB transfer business, term insurance, a mortgage or an Isa. The paper sets out FCA expectations in relation to DB transfer business, but the guidance and myriad of good and poor examples that are provided by the FCA set out their expected standards, which could be applied to any type of business. 

    We believe this is essential CPD reading for an SMF 16, adviser or administrator/para-planner. Here are some of the key take-aways. 

    Key points (suitability, suitability, suitability) 

    Income and expenditure 

    The FCA expects a detailed breakdown of income and expenditure, and some analysis of any anticipated changes. The FCA likes to see income broken down into: 

    • Essential (bills that need paying, and a client would find difficult to stop or reduce) 
    • Lifestyle (that supports the client’s standard of living, for example holidays and eating out, these are expenses a client may not want to compromise on) 
    • Discretionary (covering luxury items and gifts that a client may want to make) 

    An adviser should also cover the client’s tax position, and where relevant, look at this pre- and post-retirement. 

    Holistic advice 

    The FCA has an expectation that advisers will gather full information of the client’s assets and take these into consideration when providing advice. For example, if any other assets already held could be used to meet the clients overall financial objectives on a holistic basis. 

    As the FCA says: 

    “The better you know and understand your client, the more suitable the advice you will be able to give them. So, you should not only get hard facts such as age and occupation, but also soft facts such as feelings and opinions. For example, you should find out how they or their partner feel about guarantees, managing investments or facing the risk of stock market crashes. These discussions help you to understand your clients’ hopes and fears for retirement, how they make decisions and how they got to where they are now.” 

    Clients’ health 

    It is important, again for any advice over the medium to long term, to consider your client’s health and lifestyle factors such as smoking, drinking and the exercise that they take. The FCA says that many clients fear they will die early, particularly if their own parent died at a younger age. It is important, says the FCA, to state that a client may not inherit a non-genetic condition, and to mention that lifestyles, working conditions and medical treatments have all changed in recent years. Overall an adviser should manage a client’s expectations and consider mortality risk pragmatically. 

    Knowledge and experience 

    Advisers should be asking about client’s experiences with investments generally. A poor practice highlighted that an adviser asked about previous experiences with investments and found that a client had experience with bank and Building Society deposits and cash Isas. There was no evidence collected that their client had understood or had experience of investing in assets that could fall in value. 

    Attitude to risk 

    There is no single solution to this, many advisers use ATR tools, which can be a very good starting place, to begin a discussion. 

    The three likely concepts to an individual’s risk profile are: 

    1. Willingness to take a risk (risk attitude)
    2. Ability to take risk or risk capacity
    3. The need to take risk, including the need to accept risk to meet an objective, avoiding falling short of a goal or having wealth eroded by inflation

    Capacity for loss 

    Capacity for loss is defined as the customer’s ability to absorb falls in the value of their investment. 

    Many advisers struggle to present to their client just what capacity for loss means in a manner that can be easily understood. This should always be closely aligned with the client’s knowledge, experience and attitude to risk. It is also unlikely that FCA expectations can be met, if the essential, desired and discretionary expenditure is not fully understood and evidenced.  

    The FCA states (as a good practice example): “as well as assessing each client’s financial capacity for loss, a firm considered their client’s degree of comfort with accepting loss. Although Ms Singh could manage by withdrawing £200 less each month, she did not want to cut her income by more than £100 each month. So, her investment risk profile was based on the lower of the level of loss that she could afford to suffer and the level of loss that she was willing to accept.” 

    Client objectives and needs

    The key to meeting FCA expectations is being able to clearly establish the client needs and objectives. Such needs and objectives have to be personalised to each client, never presented on a generic basis. The FCA states “The aim of establishing the client’s objectives is to understand their priorities and what motivates them.” 

    Here the FCA provides a number of good and poor examples, which again, could apply to any type of advice being provided. 

    The FCA is keen that adviser’s uses their personal and questioning skills to uncover motives, needs and objectives. They highlight some poor examples of questions, which are likely to be answered with a “yes” but wont actually provide any insights into what is driving their client. 

    Poor questioning examples: 

    • Would you like to retire early?  
    • Do you want to maximise your lump sum?  
    • Do you want to try to increase your pension income?  
    • Do you want flexibility?  
    • Do you want to control your own money? 

    Good questioning examples: 

    • ‘To what extent are you prepared to live on a lower income so that you can leave assets to your children?’  
    • ‘How important is it for you to retire early even if this could mean running out of money later in life?’  
    • ‘Why do you want the higher amount of tax-free cash that a flexible arrangement could offer you?’  
    • ‘Why do you want to draw out higher amounts of income in the early years of retirement?’  
    • ‘How comfortable are you with the risk of running out of money in later years, and having to potentially rely on state benefits, if you have drawn higher income from your pensions in early years?’   

    Conclusion 

    Don’t be confused by the label, as we have shown above, the good and poor examples provided by the FCA don’t just apply to DB transfer business, and Paradigm has been providing training and support to our firms to bring this paper to life for all advisers rather than just Occupational Pension Transfer Specialists. 

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